AB Volvo (publ)

Welcome to the Volvo Group press conference for the second quarter. We will do as usual. We'll start off with presentations by our CEO, Martin Lundstedt, and our CFO, Tina Hultqvist. And then we will follow up with a Q&A session. And with that, Martin, I leave the word to you.

Thank you, Krister. And also from my side, welcome to the second quarter business update from the Volvo Group. We continue to experience a challenging business context with complexity and uncertainty that I have never experienced before. And in August, it will actually be 30 years since I entered into this industry. So it is really challenging times. A devastating war in Europe, a continuous pandemic with further lockdowns in different regions, supply chain and logistical constraints and an increasing inflationary pressure, among other things. And with all these factors in mind, I'm so proud to report that we delivered a very strong result in the second quarter, both in terms of volumes, profitability and return on capital employed. Net sales were up with 31% or almost 30 billion in the quarter to 119 billion SEK with major contributions coming from increased vehicle and service volumes. from positive price realization and from favorable currency effects. But also excluding currency on the top line, sales still grow with an impressive level of 20%. We also continue to serve our customers in a good way. We improved our market shares in almost all regions and brands, and we continue to grow our services. The whole organization has been doing a fantastic job by working closely both with our customers and supply chain and other business partners and thereby riding out many of the challenges we and the industry are faced with and making also the group continuing to maneuver from a position of strength. Among our customers there is still a high activity level both in the transport and construction segments despite the global turmoil. Demand continues to be larger than supply and order books are more or less full for 2022. But with a high level of uncertainty in the general economy, it is important to maintain discipline in the order book management. In addition, we continue to have a high level of flexibility in all parts of the organization to be able to swiftly adapt to changes in market conditions. So to summarize the quarter highlights, we've had, as I already said, a strong top line development with an all time high quarter in group trucks and in Volvo Penta. The adjusted operating margin amounted to 13.7 billion SEK at a margin of 11.6%. despite our conscious decision to run manufacturing with extra flexibility to serve our customers in the best possible way. But that is, of course, coming with an extra cost. But we have seen this strategy paying off in the positive market share development. The group continued to deliver good return on capital employed in industrial operations at a level of almost 27%. And despite the strong performance, the constrained supply chain situation continues and visibility remains low also moving forward. And we need to continue to adapt on a day-to-day basis. But albeit the challenges, we deliver strong financial performance in the second quarter. The total truck deliveries increased with an impressive 33% to almost 61,000 units. This was a great achievement thanks to our colleagues in all markets together with a complete supply chain, both internally, purchasing production, but also with all our supply chain partners. And the result was an all-time high production in global trucks operation for a single quarter. Volvo Construction Equipment's deliveries decreased with 27%, mainly on the back of lower volumes in China. And construction equipment, or VCE, also had some impact from strained supply chains in the quarter. Demand for electric vehicles continues to accelerate as the number of companies with pledged science-based targets are addressing their different CO2 footprints, where the decarbonization of logistics and construction activities are main focus areas on that journey. All Volvo Group business areas continue to drive their sales of electric solutions, and we continue to see a positive book to build with a steady growth rate that shall remain for many years to come. The volume development is encouraging since we are strongly focused on keeping our leading position in this field. In quarter two, we opened the order book for the heavy duty Volvo electric truck in Europe, and we are starting production and ramp up of these trucks in the third quarter this year. Orders across all business areas amounted to almost 1,500 units while we delivered 434. A strong momentum and a strong book-to-bill ratio. To strengthen our service business has been and will continue to be a key priority as we continue to untap the service potential on the back of high vehicle utilization amongst our customers and broader and wider adoption of service contracts. Service growth adjusted for FX was 11%, with good momentum in all business areas, which serves as a good indicator that our customers' activities are high and that our focused efforts in the service field is paying off. Service sales' 12-month rolling is now close to 100 billion SEK. And when it comes to trucks and the truck news, despite the global turmoil, we continue to present innovative news. Some important examples during the quarter. Volvo Trucks showcased its first fuel cell electric truck, as you might have been seeing on the introduction video. The truck has a range of 1,000 kilometers, produces through the fuel cells its own electricity on board, and it only emits water. Volvo Trucks also will introduce frame rails or side members made of fossil free steel in its battery electric heavy duty trucks. This is another important step on our journey towards our net zero commitment and to maintain also our leading position of applying fossil free steel in serious production. In the quarter, we also opened our first assembly plant for battery packs in Ghent, Belgium. In the new battery plant, cells and modules from Samsung SDI will be assembled into battery packs that are tailor-made for our heavy-duty electric ranges. And production now will coincide with the launch and the ramp-up in production of our heavy-duty Volvo trucks. On the back of high transport activities and pent-up replacement need, demands for trucks is continuing to be strong. Stronger than the industry currently can deliver. We keep our market forecast unchanged for European Union and North America at 300,000. But the total market outcome for 2022 will ultimately depend on how much the industry can deliver. Also in Brazil, a continued good momentum in the commodity and agriculture business, even if we see some weakening signs in the general economy, but we are keeping and maintaining our forecast also in this market. The forecast for China is further reduced to 800,000. We had reduced it to 1 million trucks for medium and heavy duty in last quarter, but we are further reducing to 800,000 on the back of lower economic activity and recent lockdown effects in several provinces in China. It is important to state that we have done now a number of quarters in a row that market forecasts are based on current visibility, which continues to be low. Uncertainty is significant due to inability to predict supply chain capacity and the ongoing COVID-19 pandemic and also the war in Ukraine. We continue to be restrictive in order slotting to manage order book quality and cost inflation. It is therefore increasingly important to keep even higher quality and transparency in the order book in case the economy is slowing down and when the economy will correct here. Orders in quarter two decreased with 8% and deliveries increased with 33%. And when we look to the order decrease of 8%, we have a higher bar to book firm orders due to long order book, but also to ensure pricing flexibility given the inflationary environment. However, as I have stated already in last report and the report before that, The order intake is currently not the best indicator of the market activity going forward. It is rather the size of the order book, the fleet utilization, the used trucks business and customer finance. And all these indicators are still healthy. Truck deliveries increased with an impressive 33% on the back of really hard work in the whole supply chain. And we are running our manufacturing system on a high level with extra flexibility. And we see that this is paying off in terms of volumes. It is also important for me to note that when we look at the balance, the book-to-bill and the sequential, book-to-bill was 88%, meaning that the order book decreased with seven thousand five hundred units or one and a half to two weeks and knowing that the order book almost filled now for 2022 this is a moderate decrease but we need to continue to work with that so we have the right type of lead time we had about a month of stop days in quarter two In quarter 2021 and for the same quarter this year, it was more or less a week instead, so a considerable improvement here. Apart from specific supply chain challenges for MAC in North America with some lost market shares, we have made good progress in all major regions during the quarter and first semester as regards market shares. Our commercial organization has done a great job to combine an increased market share together with an improved price position to offset the cost inflation. It also shows fantastic efforts by our colleagues in the industrial system together with all our supply chain partners. In Europe, strong total market shares by Volvo and Renault growing to 19.3% and 9.6% respectively and combined 28.9%. That is an all-time high for us. Electric market shares was even better, almost 37% for Volvo and almost 19% for Renault. So significantly higher than our strong diesel market share. In North America, I have already commented Mac, but Volvo is growing up to 10.5%. In Brazil, strong performance, growing the market shares to almost 26%. And for South Africa and Australia also, the Volvo Group has a market share above 20%, also very strong development. For Volvo Construction Equipment in early June, VCE became the first manufacturer to deliver a construction machine built using fossil-free steel to a customer for use in commercial operations. The handover took place at the United Nations Stockholm 50 plus event. Volvo Construction Equipment also announced a majority investment into Dutch firm Limac. This investment complements Volvo C's capabilities and product ranges when it comes to electrified products. In general, we do see a continued good demand with the exception of China. Construction activity in both Europe and North America remained high in Q2. However, the total market deliveries were impacted by limited machine availability because of supply chain constraints. In general, the construction equipment supply chain challenges came later than in the truck industry and hit mostly into 2022 here. Market forecast remains unchanged since last quarter for all regions. But also here, as I said on the truck side, market forecasts are based on current visibility, which is low. Also, when it comes to orders and deliveries, VC has had a restrictive order slotting to manage order book quality and cost inflation, very similar to trucks. In addition, we need to continue to deliver on the overshoots in order intake in 2020 and 2021. And it is very important to do that now step by step. BCE has well-filled order books and long lead times following the strong order intake in previous quarters, as I said, not at least in North America, as you can see in the graph here. Now book-to-bill is normalizing with a ratio of 0.95 or 0.95% in the quarter, but we still have high order backlog to deliver on. As a consequence, the restrictive slotting made orders in Q2 to decrease with 42% to ensure flexibility with pricing. However, as I stated already in the last report, order intake is currently not a good or the best indicator of the market activity. It is still the size of the order book, fleet utilization and customer finance and all these indicators or as for trucks showing healthy levels. Deliveries decreased with 27% mainly related to China, but also partly due to supply chain disturbances in other parts of the world, for example in Europe. In the bus segment, confidence among our customers has started to pick up, particularly in North America, where utilization of the bus fleet continues to increase. Orders were up with 44% and deliveries up with 22%, but still from very low levels. In the quarter, Volvo Buses launched a powerful and fuel-efficient performance step for the coach driveline. With the power ratings up to 500 hp and fuel savings of up to 9%, it will be a true cost saver for tour, charter and line haul operators. For Volvo Penta, the market remains strong in all segments, but is, however, fighting with long delivery times due to challenges in the global supply chain that is hampering also order intake and deliveries. As a consequence, orders were down with 25% and deliveries with 1%. But it is important to say that we still have a broad-based and good demand across segments and regions, and daily focus now is to continue to increase deliveries to meet the strong order book. On the business development side, yet another segment is going electric, as Volvo Penta's electric driveline now is also powering city fire trucks in North America, as you can see on the slide here. On financial services, we had record retail financing business volume during the quarter, together with a stable penetration of around 30%. VFS continues to have a strong portfolio performance with low delinquencies, indicating continued good customer activity and profitability. Volvo Financial Services is a very important lever for the transformation into new technologies and business models, and we continue to see lots of good progress. On the business development side, BFS recently began offering customer financing in Portugal, also providing that opportunity for all segments in Portugal. So by that, Krister, that was the business update. So I'll leave over to you.

Thank you, Martin. And that brings us to our next speaker, our CFO, Tina Hultqvist. Tina, can you please give us the financial numbers?

Thank you, Krister. Let's go a bit more into the financials. Group sales is 119 billion in the quarter, an increase of 18 billion, excluding the currency impacts. We have growth in most parts of the world, with the exception of Asia, driven by China. And just as Martin said, price increases and the service sales is contributing well to the growth in the quarter. If we look into the financial performance, we have an operating income of 13.7 billion in the quarter, supported by currencies of 2.8 billion. The performance is mainly driven by increased deliveries in trucks, despite the supply chain disturbances, but also the service sales is contributing well to the improved performance. We have seen a continuous pressure not only in the supply chain, but also in raw material costs and inflation in general. But thanks to a good work in the commercial area, we have been able to offset this in the market in the quarter. We are continuing to invest in new products, both in the current platform and in the coming platforms. We also have a net positive impact in the quarter from net capitalized and amortized R&D. This is an area where we are guiding, and the guidance here is that there is a wash between capitalized and amortized R&D for the second half of the year. As the business is growing, so is also selling expenses, and there is a bit of currency effects in this also. The challenges in our Chinese operation is impacting our Chinese joint venture negatively of some 600 million, and that's what you see in the bridge here in other. There is also another impact there coming from an accounting effect we had last year in VFS, which was by then positive of some 200 million. Coming back to the currency impacts, we guide a bit on the transactional currencies and the expectation right now is that this will be somewhere positive of 4 billion on a full year level. Moving into the capital, we have a positive cash flow in the quarter of 7.2 billion. This is mainly driven by the increased business activities and the result. We are continuing to build inventories, mainly connected to the supply chain disturbances, meaning that we don't have a fully efficient incoming material flow to our industrial system. But inventories continues to be a main focus for us, especially then thinking about the uncertainty and the economic outlook. We have paid dividend of some 26 billion in the quarter, but we still leave the quarter financially strong with 44 billion in the net cash. Moving into trucks, we have a sales increase of almost 40% in the quarter in trucks, excluding currencies, following the higher deliveries of some 15,000 more trucks. The demand is higher and we have improved market shares in most markets, but the main reason for the increased deliveries is really that we have managed the supply chain better than the Q2 last year, when we had almost four production stop weeks, while this year we've had around one stop week in the production in the quarter. We have strong performance in trucks, 12.2% in margin, and an operating income of 9.6 billion, partly supported by currencies, but there is also an underlying reasonable leverage in trucks in the quarter. Last year, we had a strong market in China and we had a good performance in our joint venture. This year, the market has dropped by almost two thirds, which means that we have some impacts on the performance in our Chinese joint venture. Moving into construction equipment, CE is also impacted by the market drop in China, impacting there then our operation in SDLG, where the deliveries are basically half of what they were last year. In the Volvo segment, the volumes are holding up though, and they are basically in line with where they were last year. Also, VCE has had supply chain problems in the quarter and that has somewhat limited the deliveries. But on the other hand, service sales is contributing well to VCE and we have a growth of around 5% excluding currencies. Despite the supply chain disturbances and the market drop in Asia, VCE delivers an margin of 13.8% supported by currencies. Looking into buses, buses are still struggling with the low demand, both in the coach and in the city segment. Deliveries are higher, but it's less electric buses and hybrid buses, which hampers the sales and the operating income. The good service development that we saw in Q1 is continuing also in the second quarter, mainly driven by higher utilization of the fleet in North America. Buses is continuing to have difficult business conditions and lands the quarter on a break even. Moving into Volvo Penta. Also in Volvo Penta, we have a sales increase both on engines and services, but also Penta is impacted by the supply chain disturbances. This, together with an increased inflationary pressure and somewhat increased operating expenses, has impacts on the financial performance. Still though, Penta is delivering a solid margin in line with last year, supported by currencies. Moving into financial services, our customers' business activity continues on high levels, both in the freight activities and in the construction market, and we have increased the business volumes in our customer financing operation. The portfolio performs well, and we have low write-offs and low delinquencies in the quarter. The financial performance is somewhat impacted and somewhat lower, but it's mainly connected to the one-time accounting impact of some 200 million that we had in Q2 last year. By that, I will end the financial reporting and hand over to you, Christer.

Thank you, Tina. I like the numbers. Martin, how would you summarize the quarter?

First and foremost, as we started, it has been an extremely complex situation with a high level of uncertainty and it's almost easy to forget a day like this when we are going through all the figures. This Saturday I was traveling through Sweden and actually by coincidence passing by two of our sites, Skövde, early Saturday morning seeing foundry, machining, assembly going on. A lot of commitment from our people. Passing by Växjö and then seeing Flukinger transporting three big A-45s as you can see here on the screen. I mean up to Gothenburg. So activity ongoing 24-7 with an enormous commitment of all colleagues. in the organization. And I have to say that with that as a backdrop, I mean, really understanding the complexity and the complex landscape we are living in to increase top line with 30 billion second quarter. yes one third of that might be currency but then regardless of currency i mean price realization volume increases in in products and services an operating margin of 11.6 operating results of 13.7 billion and the return on capital employed, that is 27%, is a fantastic achievement. But also what we hear from customers and penetration in VFS, service development, etc. Very strong quarter by all colleagues and all partners and very close cooperation with customers. We are proud today.

Thank you, Martin. Thank you. That means that we are ready to move to the Q&A. So we would appreciate if you stick to one question now so that everyone gets a chance to ask. One, one and a half. Yeah, one and a half. Yes, exactly. So with that, operator, we are ready for the first question.

The first question comes from the line of Hampus Egelau from Handelsbanken. Please go ahead.

Thank you very much. I'll try to make one and a half questions. It would be interesting to maybe to hear... if you could comment on, I know that you're monitoring your service network and fleet activity on the road and fleet out in the market. Could you maybe discuss it a bit if you've seen any notices, any difference in that activity and what your customers are giving in terms of feedback if they're starting to worry a bit from the macro side and are hesitating a bit on placed orders? And if you've seen any changes in calculations during the quarter? I hope that is one and a half questions. Thanks.

Absolutely Hampus, that was exactly one and a half. Now, of course, we are following this very closely, I mean, region by region, but also different segments and down to country level. And the general question is that we still see a very good and high activity level amongst our customers. I mean, it has been flat, so it's not maybe continuing to improve that we did see after COVID, but still on a high and good level. So that is comforting. Then obviously in our conversations with customers, we see and understand that everyone is also expecting that it will be some sort of correction moving forward. Exactly when will that happen? Let's see. But it's natural. I mean, increased rates, increased inflation will at one point in time more lead to corrections in the general economy and eventually then also in the need of transports. But we don't see that now. What you can say is also that there are a number of factors that is also playing in the other direction, of course, with the replacement needs, the age of the fleet, et cetera, given the underdelivery. So there are pros and cons, but we are ready, high level of flexibility on that side. But also when it comes to the placed orders, since the start of the pandemic, when we really also cleaned out the order board, we have been very disciplined in maintaining a high quality of the order book and we continue to do so. So no significant material signs at all also on that side.

Thank you. Martin, then we take the next question.

The next question comes from the line of Tom Narayan from RBC. Please go ahead.

Yes, Tom Noren, RBC. Thanks for taking the question and a half. It's on gas rationing in Germany, and now we're hearing potentially Europe. Could you just remind us of how this would impact your specific production and the supply chain? And then, you know, should there be plant shutdowns? How does that work? Could it be, you know, a day, a week, you know, or does it have to be kind of continuous periods of shutdown? Thanks.

Thank you, Tom. Of course, a very wide and complex question. If, to start with, it will be some sort of limitations when it comes to supply and how that will play out, that is too early to say. When it comes to our direct effect in the group, I mean, we have two factories and two plants in Germany for Volvo construction equipment. When it comes to the overall picture, not super big effects, but the more important is what will happen in the first tier, second tier, third tier system, where Germany, of course, plays a very important role for all industries and not at least for automotive and industrial equipment industrial goods and if there will be certain limitations that will have an impact across the board including the volvo group obviously and i can say on the positive note that we are at this moment of course well trained when it comes to adapting our situations both when it comes to immediate effect of COVID and the pandemic, but also the rippling effect out of that when it comes to supply chain constraints, logistics, etc. So we have different tools and methodologies to handle that from a group perspective. But if there will be limitations, that will have an effect as we can see it on most industries in Europe.

Okay, thank you. Thank you. We take the next question.

Next question comes from city. Please go ahead.

Thank you. Hi, Martin and Tina. So my question is on price versus cost. Very good performance, too, but we can split this into two phases, one which is the cost inflation prior to the Russia Ukraine war and then the next step up in cost inflation happen after. Now, given your price actions, Martins, do you feel that you can continue to compensate into the second half for the new cost inflation, if you like? Or can we see some incremental pressure to the margin? I'll start there.

Thank you, Claes. I think I let Tina answer that question, so we get some variation also in the voices here and our expert here.

Yes, thank you. We have some experience in handling price management and offset the inflationary pressure in the market. We will, of course, continue with price management also in the second half and going forward. So we will continue working with that, of course, as we have done the last quarters, really.

And I mean, as Tina is saying, what we feel, Klas, is also that we have had a good balance through the different quarters here now in the different phases you're referring to. So that is showing that, so to speak, the link in the whole value chain all the way from customers and upstreams has been functioning well when it comes to the methodology of how to working with it. And we will continue with the same type of methodology here. and to be because it's also balanced i mean that you are not too far ahead of the curve it's not good vis-a-vis the customers also but we've had a good balance and we are proud of that balance can i squeeze in my my half question martin so construction equipment so five percent growth in services that's still very good but a bit lower than i thought have you seen

Any weakness in construction outside of China towards the quarter end? I'm wondering if utilization is leveling off a bit. I get that the trucks demand is still solid, but we're hearing of some construction weakness in Europe. And I was just wondering if you see anything at all. I totally get the trucks demand still being solid, but on the construction side, please.

No, I mean, when we look at the general picture, we can maybe see something in small pockets, but on the general picture, still a good activity level, as I said in my presentation, in Europe and North America, when it comes to construction activities, when we see the deliveries. going down also in Europe. It was mainly then related to the supply chain constraints. But when we look at the connected fleet, it is still on good levels in most parts of Europe as well.

Great, thank you. Thank you, Claes. And then we can take the next question.

The next question comes from Michael Jackson. Please go ahead.

Hi, good morning. Thanks for taking my one and a half questions. The first one and the main one, maybe just looking at the prices of some of your key raw material inputs, which are now declining. It's amazing how things change quarter on quarter, for example, in steel, in copper, etc., How long do these need to remain at current levels before you would need to consider price reductions? I would imagine it's more than six months away, but some sort of feel for that. And then my half a question is just on energy cost inflation. Can you just give us a sense for the level of current cost inflation that you're experiencing? And if you have any offsets in the system that could potentially limit the impact in the coming quarters? Thank you.

Yes, I think both when it comes to the raw material impacts and on the energies, we are working a lot with being able to offset this. I think it's too early to say what the impact it will be from the raw materials that has reduced prices and the ones that continue with increasing prices. So I think that's just too early to say, even though we've seen some of that in the second quarter. We still continue managing the full inflation situation going forward together with the energy prices that you were mentioning.

And I think the main message here, just as Tina said, is that we have a good methodology of balancing this between the different type of cost pressures and to realize that also into our pricing. So we'll continue with the same methodology here, regardless of what of the input factors we are talking about. But more importantly, we will also continue to be to stabilize the supply chain since we are also running our production system with extra flexibility and thereby linked to cost. That is also important. It has been a right choice, by the way. We see that in the market share development. We see that also in the volumes and the top line growth. But that is another factor. So there are a number of factors that we are constantly working with in order to have the right balance. And so far, so good and continue to do the same.

Understood. Thank you, Martin. Thank you, Tina.

Thank you. And we'll move on to the next question.

The next question comes from Daniela from GS. Please go ahead. Hi, good morning.

I'll stick to what relates to cash. So your net industrial cash is 44 billion. Normally, the second half is quite a high free cash flow generation for you anyway, especially Q4. So you're likely going to end with more than that. historically you had set $30 billion of operating cash that you normally want to keep within the business, and then you've reallocated the rest to things like shareholders. I was wondering if the current environment changed in any sense the dynamics of what you think is the required operational cash you need on the business and how you think about allocation beyond that operating need. Thank you.

Yes, I think to start with, I think we have to say that we don't have a specific dividend policy. I mean, we want to have a financial strong position in order to be ready for the transformation, but also to handle situations that we are in right now with some kind of cyclicalities. So I think we should not give any kind of guidance on what the balance sheet or the net cash will be when we finalize the year or when we end the year. When it comes to cash flows, though, I think that the pattern that you are mentioning has been there for quite some time. And I think there is no reason to expect any differences to that. But in terms of dividend or what will happen to our net cash position, I think we should just stay with the thinking that we have, that it's good to have a strong financial position in the situation that we have and the transformation that we have in front of us.

And in addition to that, I mean, and you remember it also, Daniela, we talked about that during the Capital Markets Day. I mean, if we repeat a little bit what has happened over the last five years, we have been a very attractive case when it comes to yield. So, of course, to keep that balance, I mean, an attractive case for our shareholders. that has been showcased year over year here, also despite the turmoil situation that we have experienced over the last two and a half years, and still keeping a strong and solid financial position so we can continue to maneuver in a position of strength, both in the current environment, but also moving forward into the transformation. I think that is a very attractive case also for investors that are looking for solid value creation.

Great, thanks.

Thank you. We take the next question.

The next question comes from Miguel Borrega from PMP Barrivas. Please go ahead.

Hi, good morning, everyone. Just a couple of questions. You're now starting to open the books for 2023. So looking into next year, if supply chains continue to ease, do you believe you'll see an increase in truck deliveries relative to 2022? Just trying to understand how the outputs will behave next year considering the balance between your backlog and if orders remain restrictive and below 2021 levels. And then on pricing and mix, is there any change in the mix here that you would say is not sustainable? Perhaps given the supply chain constraints, you're prioritizing more high-value trucks, and this will reverse at some point? Or do you think the implied average selling price of these trucks is sustainable at these levels. Obviously, if costs come down, pricing would also be adjusted, but just trying to understand if there's anything exceptional in the mix that you don't see as recurring. Thank you.

Thanks. First and foremost, obviously, I mean, we are not giving any guidance for 2023 at this point in time. It will happen next quarter as we normally do then our first guidance for 2023. Having said that, we have also been clear in the report that we still see a situation where supply is actually dictating, so to speak, the size of the market. gradually due to different factors both at one point in time the easing of the supply chains to your point but also the general economic activity that will at one point in time shift from a supply to a demand decided market when that will happen let's see and what effect that will have also when it comes to Because if that could have been possible today, it should have been, as we see it, a bigger market than we have today because it's dictated by supply. So we continue to follow that. We have the right type of flexibility, both for upward pressure as well as downward pressure. But having said that, on pricing and mix, this is very important to state that we have not taking any decisive measures to prioritize, from a Volvo Group standpoint, products or customers over others. And the reason is that we are in B2B. We have long-term relations with our customers, and we cannot suddenly say that you are actually buying a solution that is, from a Volvo Group, less worth short-term. So we don't have that type of pricing and mix effects as you might possibly have heard about in B2C sectors such as automotive.

It's very clear. Thank you.

Thank you. We have time for another question.

The next question comes from Eric Goldrang from CEE. Please go ahead.

Thank you. I have one question on the order book and the discipline you talk about. I guess the magnitude of our forward deliveries could go down if we do get a proper recession here is determined by the quality of that order book. And you talk a lot about the discipline. Could you say something? What specifically are you doing differently compared to prior cycles in terms of managing the quality of that order book? Why would it be different this time around?

Yeah, obviously, I mean, we are not naive. We have been seeing a number of cycles and we have also every cycle got a lot of learnings. First and foremost, that we actually have the connectivity so we can see the movements and how it looks like also not only that they are with certain dealers, but where they are with certain dealers, including bodybuilders. We have also the advantage of cleaning out, as I said, in the second quarter of 2020, the order board also, and build that up a little bit from almost zero, not really zero, but almost zero. And then we continue to build on that. And then obviously when we look into also downstream factors like finished inventory, inventory of new trucks, but also use is still on healthy level. So all the early indicators are still here. But having said that, Erik, we all know that if the market turns, it can turn quickly and we need to have a high level of flexibility and maintain discipline also in that case, also go through again the order board as we did in April, May 2020. I think we have since been working with all the different parameters and also I have to say for the different troughs we have seen in regions over the last five, six years, we have actually showed also that we have been rather quick in adapting to the current situation. It will be partly different in relation to prior cycle troughs, but also rather confident what we have done in North America and Latin America and in other parts of the world when we have seen these troughs on a regional basis.

Okay, thank you. Then my half question would be for Tina. You said a wash between capitalization and amortization of R&D in the second half. That's a quite big delta compared to H1. Are there specific projects explaining that or what's the, why the change?

Yes, I mean, we are launching our new electric vehicles in the autumn here. So that's really projects that has been in the face of capitalization up until now, basically. And then they are moving into more an amortization phase for the second half here with the new electric Volvo Trucks vehicles. On the heavy duty range. On the heavy duty range, yes.

That's clear. Thank you. Perfect. Then we take the next question.

The next question comes from Ola Sederholm from ABG, Sander Corlea.

Please go ahead. Hi, everyone. Ola from ABG. Just my one and a half, of course. My first one is on cash flow then. You have excess inventory now. We know second half is stronger in terms of working capital release, just as you indicated, as to normal seasonal development. But what's your plan to get rid of excess inventories going forward? Is that something you can control or are you still sort of in the hands of the market?

Maybe I should comment on that. Well, of course, it depends on the volumes that we are having, but we also have to remember that the main part of the inventories that we have built up is coming from the supply chain disturbances. So it's incoming material and inventories that we have in the plants. As Martin was mentioning, the finished unit inventories is usually still on a low level. So it depends very much on where we will be in the supply chain in the second half of the year.

And I think this is very important, what Tina is saying here, that we have these very deliberate actions taken in order to pull home more material. And again, that has been showing positive when it comes to the market share development. Now, I mean, if we will see a gradual easing of the supply chain constraints, obviously, we will also work with this to trim it to normal levels. But in the balance of everything, that has been the right choice, given that we have it where we have it and not in finished products, if I put it like that.

Excellent, thanks. And my half question is on the market share development. pretty impressive. Clearly, you are able to produce more trucks than your competitors. But do you think there is something going on in the market share department that is sustainable that you have taken a step up in Europe, for example, and that you can think you can hold on to this going forward?

I think, of course, we should be humble in a situation like this and say that in a market dictated by supply, it is also, of course, an advantage if you have had the right type of supply chain collaboration that we have seen. We are proud of that, and that has brought us to very good and strong levels almost since, you can say, quarter... late Q2 last year and then continuous good progress. But of course Amin having said that we also feel that for all the deliveries that we have done we have a good feedback when it comes to customers of quality of performance and eventually it is also an opportunity for us to reach more customers and we will continue to work on that so But early to say, I mean, what will be the long-term effects of that? But we will continue to utilize the methodology that we have had that has served us and most importantly, our customers well.

Thank you. We are ready for the next question.

The next question comes from Medlis from Kebler-Chevreux. Please go ahead.

Yeah, hi. Thank you for taking my question. Just trying your outlook there a bit. And for the North American market, I mean, we will see some emission regulation increasing in 2024. And I was just wondering if you expect to see some free-buy impact next year due to this, or is it sort of too limited emission regulations to have any impact? such impact?

Yeah, I mean, of course, it is legislation with, that is, I should not say a small legislation. It is an important one when it comes to CO2 and greenhouse gases. It might have certain effect that is actually holding up the market in 2023. Difficult to judge exactly how much that will play in and it depends on the overall situation also since we since long now have had also an under supply into the north american market as well so again a little bit what will be worked here but as always when you have a rather big regulatory steps it it is always having some sort of pre-buy at least but but a little bit earlier to judge given also all the other factors

And my half one is sort of looking at freight rates. And so, I mean, spot rates, if you just for fuel prices and so on, are down somewhat. Do you see that as a sort of indication that the market is in balance currency or what's the reason?

No, but I think it is right. Of course, there have been a number of uncertainties, inflation building up, interest rates, etc. At one point in time, of course, that will have certain effects also on the total general economy and how that, of course, also will affect the demand of transport, etc. Normally, that is an indicator. Again, what we see is high demand, high utilization of the fleet, as we can read it in in our connected data but but again we need to be very close here to to make sure that we are following what the market conditions will how the market conditions will continue to develop so this is a very important sign to to keep a close eye on okay thank you very much thank you and i think then we have time for one final question

The final question comes from Anthony Dixon, AutoBHF. Please go ahead.

Yes, hi. Thanks for taking my question. My question was regarding the order intake. So it's down year on year, but quite a nice improvement sequentially, port on port. So that would suggest an improvement in the supply chain conditions. So maybe if you could just confirm that and also address what your expectations are for H2. If you can expect an improvement and what kind of visibility do you have on that? And then also just trying to get a sense of how these supply chain disruptions are still impacting your ability to take on additional orders. Are they still really limiting your order intake? Could you maybe mention your waiting lists to when they extend to and have that evolved in the last couple of months? Thank you.

First and foremost, if we start with the order intake, it is true that we gradually have opened up and being less, so to speak, firm in our discipline. We are still firm in our discipline, but we have been able to open up a little bit more. as i commented the book to build both in trucks and construction equipment are getting closer to to balance now which is good for for trucks we took down the order book with approximately seven eight thousand units and that is representing then one and a half two weeks of of production, but knowing that we've had a quarters of order book, and as I said, the 2022 almost filled, we need to continue to do so in order to have the right type of lead time, balance, pricing, inflation, deliveries, et cetera. So I think the order intake as such is not the main sign of the supply chain easing or not. It is more the output that we have seen. And I think that is rather impressive. I mean, 61,000 trucks in quarter two, All-time high production for our global trucks operations in a quarter with the supply chain constraints is of course a sign that we have been able to continuously improve our work with our supply chain partners, T1 but also T2, T3, T4. Having said that, we are also clear that this is not over until it's over. We still have a lot of uncertainty in the supply chains, short type of commitments, depending on a continuous struggle when it comes to electronics and semiconductors, for example, but also a lot of other input materials, logistics. So we continue to utilize the methodology that we've had. And I think it's more about seeing that with the order and deliveries in a reasonable balance, it's a good sign also that we are starting to see, okay, we can work with the order book that we have. So I think that is how we look upon it.

Thank you, Martin. And that finalizes the Q&A. And then if anyone missed our Capital Market Day, I would recommend the replay that is available on our homepage and on YouTube. Perfect summer activity. With that, I think we see you next time. Yeah. I wish everyone a nice summer. Take care.

Take care.